Increasing numbers of individuals every day are conducting their personal financial business, such as banking and investing, on-line. Today, with access to the Internet so prevalent, many are actively managing their own stock portfolios on a day-to-day basis. The efficiencies gained by using the services of on-line brokerages such as E*Trade, Datek, and Ameritrade, have made the associated per-trade costs sufficiently low to make such transactions economically feasible for an individual.
While the Internet has allowed increased access to the trading of stocks, effectively lowering the barrier of entry for an individual, on-line brokerages must still comply with reporting rules from the United States Securities and Exchange Commission (SEC). With respect to the purchase of certain securities such as mutual funds, a user must be provided with certain documents, such as a fund prospectus prior to the purchase of any shares in the mutual fund. In addition, after purchasing shares in a mutual fund, subsequent reports also must be sent to the investor.
Compliance information, as used herein, is information which must be provided to individuals to comply with the regulations of a governing body or non-governmental regulating body. Securities information is a general term which relates to any information dealing with securities and/or securities related transactions. Correspondence relating to securities, filing information, holding information, prospectus information are all examples of securities information. Certain types of information may be both compliance information and securities information, such as when securities information is information about a security that a government or a stock exchange requires be made available or delivered to an investor (or potential inventor) in that security. For example, the SEC and the National Association of Securities Dealers (“NASD”) each requires the filing of certain information by an issuer of securities; this is an example of securities information that is also compliance information. The SEC and NASD require that a certain subset of the securities information be made available to an investor in a security—this is also compliance information, and is also referred to as regulated financial information documents (“RFID”).
One example of compliance information is a mutual fund prospectus. The mutual fund prospectus could be located somewhere within a filing that also contains other securities information, such as an amendment to a different prospectus, or a semi-annual report. Compliance information for a mutual fund may include, but is not limited to, prospectuses, supplements to prospectuses (“stickers”), statements of additional information (“SAI”), supplements to SAIs, annual reports, and semi-annual reports. Certain sales and marketing information can also be considered compliance information since its distribution is also regulated by government agency and stock exchange rules. As another example, compliance information for a variable annuity fund includes the compliance information for the variable annuity fund, and the compliance information for each of the funds available for investment.
Recently, government agencies and securities exchanges have begun allowing securities issuers and intermediaries to comply with information delivery requirements by approving the delivery of the information in an electronic format, for example, by transmitting the information from one computer to another over a computer network. The SEC currently requires that investors consent to receiving compliance information in an electronic format. One method for obtaining such user consent is described in U.S. patent application Ser. No. 09/023,039 filed on Feb. 12, 1998 and herein incorporated by reference. Electronic delivery of compliance information has significantly reduced costs for entities which are required to disclose securities information.
Securities information is available in various electronic databases including the Securities SEC's EDGAR database. EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others that are required by law to file information with the SEC. The primary purpose of EDGAR is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the agency. EDGAR information is available on the Internet at www.sec.gov. Other bodies such as the United States Internal Revenue Service (“IRS”) may also offer similar storage of information which may be relevant to the exchange of securities.
Although securities information is available from databases like EDGAR, the information is not readily available in a useful electronic format that enables compliance with government and securities exchange regulations, especially with regard to mutual funds and other non-corporate securities. EDGAR, as a result of its design, makes information regarding non-corporate securities difficult to find. In EDGAR, mutual fund information, for example, is listed as a submission of the corporate issuer, not the fund name that is marketed to the consumer, and one submission may include information for more than one mutual fund. EDGAR submissions also may include updates and amendments to earlier submitted information. It is quite possible for a single mutual fund to have more than fifty amendments to its compliance information. An investor attempting to locate the complete set of compliance information for a mutual fund directly from EDGAR would need to retrieve all applicable amendments. This is time-consuming, and it is difficult for the investor, when attempting to gather compliance information from EDGAR, to know if all the amendments have actually been located, if the retrieved information about the fund is complete, or if the retrieved information is up-to-date.
Before securities information is distributed to investors it may be updated and “cleaned” so that the information appears in a more useful format to the investor. One process for processing raw securities data into a useable format is described in U.S. Pat. No. 6,122,635, issued on Sep. 19, 2000 and herein incorporated by reference.
Despite the availability of delivering compliance information in electronic form, many entities still rely on more traditional paper methods of delivering compliance information. One obstacle to widespread electronic delivery is the variable nature of the industry. Due to heavy regulation by federal and state agencies, financial institutions that manufacture and distribute securities information have been at a disadvantage in building new delivery solutions.
As a result, entities rely on the industry practice, which is to send each investor the contract prospectus and all sub-account prospectuses in which the investor may allocate funds. This procedure is normally practiced for both pre-sales materials and on an annual basis after an account is opened. According to NAVA's Annuity Fact Book, the average number of sub-accounts available in a retail contract was 33 in 2001. Using average page counts derived from the EDGAR database, this means the industry is sending an average of over 3000 pages to an investor per year. This results in over 30 billion pages produced annually for the industry.
These pages are typically sent in three mailings occurring in February, May, and August each year. Annual reports for all sub-accounts (on average 33) are sent in February. May is the largest mailing and includes the contract and sub-fund prospectus. In August, semi-annual reports for the sub-funds are sent. Annual and semi-annual mailings must begin within 60 days of the closing of the relevant sub-fund accounting period. This is for the average of 33 sub-accounts per contract, regardless of the investor's allocation. This system yields billions of pages of compliance information are printed and shipped to warehouses. Workers then pick documents from shelves and pack them into envelopes for shipment, or the individual documents are combined into large books of paper that can be large and heavy. Those documents are expensive to maintain and to ship, and frequently are wasted as compliance information can rapidly change and quickly render pre-printed pamphlets obsolete.
On the investor side, the system can be overwhelming. Individual investors receive thousands of pages a year, much of it irrelevant to the particular investor.
The current system is unsatisfactory to both investors and brokerages.